Quant and traditional alpha-seeking methods converging – TABB

Automated, quantitative strategies used to discover and capture alpha in equities will start to converge with more traditional equities strategies, as both traditional asset managers and quants borrow from each other’s strategies, according to Adam Sussman, director of research at research and consulting firm TABB Group.

Automated, quantitative strategies used to discover and capture alpha in equities will start to converge with more traditional equities strategies, as both traditional asset managers and quants borrow from each other’s strategies, according to Adam Sussman, director of research at research and consulting firm TABB Group.

In a new TABB research report, Sussman and co-author E. Paul Rowady, a contributing analyst, estimate that quantitative strategies represent nearly 33% of total US equity assets under management, up from just 14% in 2000.

Quantitative strategies take a variety of forms, but typically involve searching for patterns in data that could suggest market inefficiencies and imbalances, for example if a particular stock or sector is momentarily undervalued, and capitalising on the findings.

“Quantitatively managed strategies have been eating away at more classic approaches to portfolio management for quite some time, but that doesn’t mean the more traditional asset management techniques will go the way of the dodo,” Sussman told theTRADEnews.com. “I see those two worlds coming together a little bit more. What you call quant and what you call traditional is going to become more and more blurred and in five or 10 years it will be more difficult to make the distinction.”

Sussman argues that more traditional asset managers are increasingly adopting more quantitative techniques, while more quantitatively-driven firms are seeking to introduce more human elements to their strategies, such as predicting how other firms will react to trends and acting accordingly.

Part of the problem with more widespread adoption of quantitative, automated strategies is that the more people that are capable of spotting and acting on market inefficiencies and imbalances and acting on them quickly, the shorter the duration of those opportunities. As a result, while technology has advanced to enable faster recognition and execution, this has not necessarily made quants’ jobs easier.

“Alpha has always been hard to uncover. Back in the day you had to invent new technologies to do it, which wasn’t easy,” said Sussman. “Now maybe the technology side isn’t such a challenge but finding a unique strategy is more difficult. It is hard to say that it is more or less challenging than before.”

However, while windows of opportunity to capture alpha are shrinking, there are plenty of new opportunities for converting traditional investment techniques into more systematic and automated strategies. One example, according to Sussman, is hedge fund AQR’s development of its own momentum indices. “Momentum investing has been around for decades but they are putting some systematic thinking behind it and doing it in a very quantitative fashion,” he said. “We certainly believe that more strategies will become more automated and quantitative, and there are still a lot of fundamental strategies left to be implemented in that fashion.”